Employment Law Blog

Who Breached First? Protecting the enforceability of an employer’s no-compete agreement in Kentucky.

Many employers are aware of the substantial benefits a no-compete agreement can provide. No-compete agreements (also referred to as covenants not to compete) offer effective protection for an employer’s legitimate business interests, including but not limited to preventing former employees from taking away clients or customers[i] and protecting against the use and dissemination of an employer’s confidential and/or proprietary information.[ii] Indeed, even Kentucky courts acknowledge that no-compete agreements serve as a “valuable business tool” for employers. [iii]

Although many employers recognize the value of consulting a knowledgeable attorney to ensure that the no-compete agreement adequately addresses the employer’s business interests and is properly executed, many are unaware that an employer’s acts after executing the no-compete agreement can affect its enforceability.

In Kentucky, a contract – including an employment agreement containing a no-compete provision – may be rescinded where non-performance, misrepresentation, or breach is substantial or material.[iv] Kentucky courts expressly recognize that a former employee’s allegation that his or her employer breached the employment contract first may constitute a valid defense against the employer’s attempt to enforce its no-compete agreement.[v] Simply put, the court may prohibit an employer from enforcing an otherwise valid no-compete agreement if it finds that the employer first breached a material term of that agreement.

Importantly, not all employer actions will constitute a breach of an employment agreement, particularly if the breach is “slight” or “inconsequential.”[vi] Kentucky courts analyze an employer’s acts within the context of the surrounding circumstances and the specific terms of the no-compete agreement. Courts applying Kentucky law have held that the employer first breached the employment agreement in a number of cases and for various reasons, specifically including instances in which the employer:

a)      Reduced the exclusive territory reserved for the employee;[vii]

b)      Terminated the employee within a few months after executing the no-compete agreement;[viii]

c)      Terminated an employee in a particularly harsh or unjust manner;[ix] or 

d)    Engaged in other acts which strongly indicate bad faith.[x]

The court’s inquiry as to whether an employer first breached the employment agreement is extremely fact-specific. To that end, it is imperative that an employer consult an attorney to not only ensure that its no-compete agreement adequately protects its business interests, but also that acts performed by the employer after signing the no-compete agreement do not breach a material term of employment. An attorney with genuine experience in employment law can help guide an employer to ensure that its acts will not hinder the enforcement of a no-compete agreement and can ultimately protect the employer’s legitimate business interests from potential harm.

Services may be performed by others.

This article does not constitute legal advice.

[i] Central Adjustment Bureau, Inc. v. Ingram Assocs., Inc., 622 S.W.2d 681, 686 (Ky. App. 1981).

[ii] Crowell v. Woodruff, 245 S.W.2d 447, 450 (Ky. App. 1951). 

[iii] Hammons v. Big Sandy Claims Servs., Inc., 567 S.W.2d 313, 315 (Ky. App. 1978). 

[iv] Evergreen Land Co. v. Gatti, Ky. App, 554 S.W.2d 862, 865 (1977).

[v] Webb v. Wagon, Inc., 255 S.W. 2d 459 (Ky. App. 1953).

[vi] Fay E. Sams Money Purchase Pension Plan v. Jansen, et al., 3 S.W.3d 753, 757 (Ky. Ct. App. 1999); see also S. Wabash Communs., Ltd. v. Union County Broad. Co., 69 Fed. Appx. 285, 289 (6th Cir. Ky. 2003).

[vii] Webb v. Wagon, Inc., 255 S.W.2d at 461.

[viii] Crowell v. Woodruff, 245 S.W.2d 447 (1951).

[ix] Lantech.com v. Yarbrough, 2007 WL 2669115 (6th Cir. 2007).

[x] Id.